A Wall Street Journal story, quoting unnamed sources, said the internal probe made several allegations against former Chairman and Chief Executive Robert O’Connell, including that he inflated the special retirement account value by tens of millions of dollars.
In announcing its intent to fire O’Connell, who had been CEO nearly seven years, the company said only that its action was related to his “conduct.” Several other executives also have been asked to leave in recent days, the Journal sources said.
In a statement to the Journal, new Chairman James Birle declined to comment on the findings of the probe, but said the board “has a zero-tolerance policy for any acts … that violate the letter and the spirit of the company’s code of ethics. When we learned of possible wrongdoings and misdeeds by our Chief Executive Officer, we began a thorough and fair investigation” and later gave O’Connell a notice of intent to “terminate his employment, for cause,” he said.
According to the Journal, MassMutual earlier this week gave Massachusetts insurance regulators a draft of the 59-page report on O’Connell prepared by outside board advisors. The company also has alerted regulators in three other states.
A “Shadow” 401(k)
One accusation against O’Connell involves a “shadow” supplemental retirement account, which was akin to a 401(k) plan but involved only hypothetical assets, the Journal said.Over time, such an account’s value increases or decreases based on hypothetical trades made by the executive. No actual investments or trades are made, but the account represents a future company obligation to the executive. Upon retirement, the executive gets a cash payout equal to the value of the account.
A report in the Boston Globe also cites a recounting of matters contained in O’Connell’s termination letter, as reported by an O’Connell associate. That letter referenced the funding of that account with a payment of more than $4 million MassMutual awarded O’Connell when he was hired as chief executive in 1998 to make up for compensation he was giving up at his former employer, American International Group. O’Connell deposited the funds in a ”shadow account,” according to the letter and he subsequently made huge gains with his investment choices –which the board is now questioning, according to the Globe.
The board probe found that ‘Connell was supposed to be buying and selling only mutual funds and selected stocks in the account, according to the WSJ. However, the probe found he improperly credited to the account purchases of large amounts of hot initial public offerings at their original offering prices, according to the Journal. Initially, O’Connell was allowed to make hypothetical trades in his retirement account four times a year, in a dozen mutual funds, the Journal sources said. In early 2000, O’Connell got permission from the board to trade as well in 15 listed securities, according to the report.
The Journal said O’Connell went beyond the allowed trading, sometimes dabbling in hypothetical shares of hot IPOs. The board report alleges that when JetBlue Airways Corp. went public in 2002, for example, O’Connell allocated himself 234,263 phantom shares at the IPO price of $27 a share. The stock opened at $37.52 on April 12, 2002, and closed at $45 that same day. As result, the MassMutual CEO made a paper gain of about $4.2 million in that single day, according to the Journal. The sources said no actual investors received as many shares as O’Connell’s phantom allocation.
The probe found that O’Connell’s hypothetical account swelled to $30.6 million at the end of March from $4.1 million in late 1998, according to the Journal sources. That’s a 37% average annual gain.
The board was unaware of the unusual trading and the size of O’Connell’s retirement fund until recently, the Journal said. He wasn’t expected to receive the amount in the account until at least 2008, when he will turn 65, the sources said.
One person familiar with the matter said O’Connell never received a penny from the supplemental retirement account, the Journal reported.
A Wider Probe
After the initial investigation ended, several directors began making their own inquiries into O’Connell’s conduct, and in February 2005 the board hired a different law firm, Cadwalader, Wickersham & Taft LLP, to lead a deeper probe, the Journal reported.
Last week, the board met at a hotel near the Hartford, Connecticut airport and confronted O’Connell with a three-page termination notice, according to the sources. Among other things, the notice accused him of “willful malfeasance” for his improper use of the supplemental retirement account..
Under O’Connell’s 1998 employment agreement, the board was obligated to give him 15 days notice if he was fired for cause. He is allowed to “cure” the reasons for his dismissal during that period, which ends June 23. If he fails to correct those issues, he remains ultimately entitled to arbitration, according to the story.